Should central bankers’ pay depend on the accuracy of their inflation forecasts?
The Bank of England’s forecasting record, both for inflation and growth, has in recent years been woeful.
But would the Bank have done any better if its officials’ pay depended on the forecasts’ accuracy?
According to a paper out today from the Centre for Economic Policy Research, the answer is yes.
The turning tide is far from the Fed
Tim Duy says that the the Fed is behind the turning tide of economic data and “remains locked into a forecast that anticipates output growth hovering near potential”.
“In short: In general, the data flow of the last eight weeks is clearly encouraging. To be sure, not every release, like the employment report, is perfect. But enough are perfect that forecasters are quickly reversing the downgrades made just a few months ago during the mid-year slowdown. Will the data suddenly turn on us again? Always possible, always something to watch for, but I don’t think that should be the expected path. Right now, the data suggest the US economy might start firing on more than just a few of its eight cylinders. A little optimism is justified. Don’t expect the Fed to reverse course soon – they have yet to embrace the possibility that the economy is set to grow at something above trend. But a data flow like this cannot be ignored forever. Look for more glimmers of hope creeping into Fedspeak in the weeks ahead.”
I agree with most of Tim’s analysis but I don’t agree that the Fed has an overly negative forecast. The Fed’s forecasts have, if anything, been overly optimistic – but the data have moved in their direction and private forecasters are moving up to meet them. Put it another way: the tide of the data may have turned but the FOMC is quite a long way up the beach. Read more
FOMC motives and forecasting inflation
The St Louis Fed today published a fascinating paper on how FOMC members’ motives may play a role in their inflation forecasting.
The paper found, strangely, that by removing FOMC members’ three highest and lowest inflation predictions, the midpoint of the range of price estimates was more accurate than the midpoint of all FOMC members predictions. Read more
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Michael Steen, Frankfurt bureau chief, covers the ECB and the eurozone's economies. He joined the Financial Times in 2007 as Amsterdam correspondent and later worked as a front page news editor in London. Before joining the FT, he spent nine years as a correspondent at Reuters, mostly in foreign postings that included a previous stint in Frankfurt, as well as Moscow, Kiev and central Asia. He read German and Russian at Cambridge.RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
